Saudi-led alliance moves to isolate Qatar over Iran tensions

By Glen Carey and Zaid Sabah on 6/5/2017

RIYADH (Bloomberg) -- Saudi Arabia and three other Arab countries cut off most diplomatic and economic ties to Qatar, in an unprecedented move designed to punish one of the region’s financial superpowers for its ties with Iran and Islamist groups in the region.

Oil gained and Qatari stocks plunged after Saudi Arabia, Bahrain, the United Arab Emirates and Egypt said they will suspend air and sea travel to and from the Gulf emirate. Saudi Arabia will also shut land crossings with its neighbor, potentially depriving the emirate of imports through its only land border. Qatar called the accusations “baseless” and said they were part of a plan to “impose guardianship on the state, which in itself is a violation of sovereignty.”

Qatar is one of the world’s richest countries and of strategic importance, being the biggest producer of liquefied natural gas. A country with a population smaller than Houston, its $335 billion sovereign wealth fund holds stakes in companies from Barclays Plc and Credit Suisse Group. It also hosts the forward headquarters of CENTCOM, the U.S. military’s central command in the Middle East.

Emboldened by warmer U.S. ties under President Donald Trump, the Saudi-led alliance is seeking to stamp out any opposition to forming a united front against Shiite-ruled Iran. And while Monday’s escalation is unlikely to hurt energy exports from the Gulf, it threatens to have far-reaching effects on Qatar.

“There are going to be implications for people, for travelers, for business people. More than that, it brings the geopolitical risks into perspective,” Tarek Fadlallah, the chief executive officer of Nomura Asset Management Middle East, said in an interview to Bloomberg Television. “Since this is an unprecedented move, it is very difficult to see how it plays out.”

Brent crude rose as much as 1.6% to $50.74/bbl on London-based ICE Futures Europe exchange, before paring gains to 0.4% in London. Heightened tensions between Saudi Arabia, the world’s biggest crude exporter, and Iran typically draw market attention to the Strait of Hormuz, through which the U.S. Department of Energy estimates about 30% of the seaborne oil trade passes.

The five countries involved in the dispute are U.S. allies, and Qatar has committed $35 billion to invest in American assets. The Qatar Investment Authority, the country’s sovereign wealth fund, plans to open an office in the Silicon Valley.

Secretary of State Rex Tillerson said it’s important that the Gulf states remain unified and encouraged the various parties to address their differences. Speaking at a news conference in Sydney, he said the crisis won’t undermine the fight on terrorism.

“What we’re seeing is a growing list of some irritants in the region that have been there for some time,” Tillerson said. “Obviously they’ve now bubbled up to a level that countries decided they needed to take action in an effort to have those differences addressed.”

Monday’s action is an escalation of a crisis that started shortly after Trump’s last month trip to Saudi Arabia, where he and King Salman singled out Iran as the world’s main sponsor of terrorism.

Saudi and U.A.E. media outlets then launched verbal assaults against Qatar, which intensified after Sheikh Tamim’s phone call with Iranian President Hassan Rouhani over the weekend in apparent defiance of Saudi criticism.

“Qatar is right in the middle of the GCC countries and it has tried to pursue an independent foreign policy,” said Peter Sluglett, director of the Middle East Institute of the National University of Singapore. “The idea is to bring Qatar to heel.”

Past Crisis

Disagreements among the six GCC members have flared in the past, and tensions with Qatar could be traced to the mid-1990s when Al Jazeera television was launched from Doha, providing a platform for Arab dissidents to criticize autocratic governments in the region except Qatar’s.

The Gulf nation also played a key role in supporting anti-regime movements during the Arab Spring, acting against Saudi and U.A.E. interests by bankrolling the Muslim Brotherhood’s government in Egypt. Qatar also hosts members of Hamas’s exiled leadership and maintains ties with Iran.

In 2014, Saudi Arabia, the U.A.E. and Bahrain temporarily withdrew their ambassadors from Qatar. That dispute centered on Egypt following the army-led ouster of Islamist President Mohamed Mursi, a Muslim Brotherhood leader.

This time, Saudi Arabia cited Qatar’s support of “terrorist groups aiming to destabilize the region,” including the Muslim Brotherhood, Islamic State and al-Qaeda. It accused Qatar of supporting “Iranian-backed terrorist groups” operating in the kingdom’s eastern province as well as Bahrain.

Saudi Arabia, along with Bahrain and the U.A.E., gave Qatari diplomats 48 hours to leave.

The crisis comes shortly after Moody’s Investor Service cut Qatar’s credit rating by one level to Aa3, the fourth-highest investment grade, citing uncertainty over its economic growth model.

“Qatar is economically and socially most vulnerable from food and other non-energy imports,” said Paul Sullivan, a Middle East expert at Georgetown University. “If there is a true blockade, this could be a big problem for them. Rules stopping citizens of the U.A.E., Saudi Arabia and Bahrain from even transiting via Qatar could cause significant disruptions."